Supply and Demand

Since the massive earthquake and tsunami that struck Japan on March 11, there has been a steady stream of damage assessments, loss estimates and predictions flowing from the country that change daily. Left unsaid in these analyses is how inadequately these numbers describe the true scope and impact of such a massive human tragedy. Concerns over radiation from the crippled Fukushima Dai-ichi nuclear plant escaping into the atmosphere continue to grow, making it even clearer that the consequences of March 11 will have an impact on the Japanese people for generations to come.

For many businesses in North America, concerns about the impact of the disaster are more short term, and centre around supply chain disruption for high-tech parts and products manufactured in Japan. One of the beats I used to cover was the Canadian coatings manufacturing and industrial finishing sector; so one of the stories that caught my attention recently was about the closing of the Merck plant in Onahama, a coastal town near the Fukushima power plant. The Merck plant is the only one in the world that manufactures Xirallic, a metallic pigment used by several carmakers in their exterior finishes.

The Canadian paint manufacturing sector is small at barely $2 billion a year. Many of the paint manufacturers that haven’t left the country in the last decade are making highly-engineered products for the automotive market with expensive ingredients and higher profit margins. However, the downturn in car production in 2008 put the whole paint industry on its heels, and I wondered if something like the disruption in supply of this shiny pigment might be enough to take down more companies.

Don’t think it could happen? Then let me tell you the fable about cell phone makers Ericsson and Nokia and a fire in 2000 at a semiconductor plant in New Mexico. The Philips plant supplied both companies with a critical component. After the fire, Nokia immediately went looking for other sources of supply, including working with Philips to retool other plants. Executives at Ericsson, on the other hand, were slow to respond and relied on assurances that the disruption would be brief. The result? Nokia was able to massively increase market share. And Ericsson? Well, they merged with Sony.

The lesson for brokers is that now is a good time to talk to your clients about supply chain risk management. No one who has suppliers in Japan should think that some contingent business interruption coverage will solve all their problems.